Articles Tagged ‘T. Ray Phillips’

Why Owners Choose Not To Sell

Friday, July 31st, 2015

Presented by T. Ray Phillips

Some owners make a choice not to sell their companies for very legitimate reasons. Among them are:

They still have enough fire in the belly to fuel their investment of time and energy in the business. They are grooming interested family members or employees to one day assume the reins.

Some owners, however, have businesses that are prepared for sale, but hesitate. Why? These owners typically don’t sell when they should because: 1) they procrastinate; 2) they fear the unknown; or 3) they fear losing the known.

Procrastination
Procrastination on the part of an owner is not uncommon and has many causes.

First, some owners just don’t know where or how to start planning an exit. If you are one of those owners, then reading the remainder of this article is a good start. The next step is to contact our offices to begin the process of creating an Exit Plan that allows you to cash out of your business and leave in style when you are ready to do so.

Second, some owners think that they can always sell later. These owners overlook the demographic evidence indicating that when most Boomers reach retirement age, the glut of companies in the marketplace may drive prices down. Other owners in this group understand that the level of activity in the Mergers & Acquisition market can have a huge affect on the sale price of a company and their strategy is to wait until the market recovers.

In the third group of procrastinating owners are those who believe that because they have “good” businesses, their exits require no significant planning. When they think about selling, they assume that there isn’t much for them to do because when the time is right, the right buyers will appear and pay them great prices for their companies.It does happen, albeit quite rarely, that the right buyer appears and pays a great price for a great company. However, it makes more sense to prepare for the biggest financial transaction of your life than to entrust the success of your business exit to Lady Luck.

Fear of the Unknown
Owners who suffer from the fear of the unknown usually hold one (or more) of the following opinions:

I don’t think the business is worth enough to satisfy my financial needs and objectives.
If the employees discover I’m trying to sell, they will all quit.
Because I’m indispensable to the company, I’ll be required to work years for a new owner and I don’t like working for anyone!
The sale process will take too long and cost too much.

Fear of Losing the Known
On the other hand, the fear of losing the known is usually based on the following:

The business has been my life—or at least it has given my life a great deal of meaning and focus; without it I may feel lost.
The government will take too much in taxes. It is easier, less risky and more lucrative to stay, enjoy the cash flow and then leave getting paid over time.

What will I do after I sell and leave the business? I don’t know what my life will look like if I leave.

If one (or more) of these concerns resonates with you, let’s meet to assess them.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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Buy-Sell Agreements Should Protect You, Your Co-Owners And Your Company

Wednesday, November 5th, 2014

Presented by T. Ray Phillips

Imagine, on the eve of your wedding, that you plan to divorce, on a friendly basis of course, in 15 years or so. During those 15 years, you will work diligently, and quite successfully, to build a business.

On the preordained day that your marriage ends, you announce that you are willing to give your soon-to-be ex-spouse one-half of your company’s business value—in cash. And you let your “ex” value your company because those are the terms of the agreement the two of you signed a year after you were married.

Sounds ridiculous, no? Yet, you may have done something quite similar (and similarly ridiculous) in your business with your co-owners.

Few owners begin working together with an expectation of future acrimony, much less litigation. Fewer still give thought to one day leaving the business—even on friendly terms. Indeed most exits are not precipitated by a disagreement among co-owners; instead owners leave for a variety of reasons and simply want to do so with their share of business value.

And remember, one day you will leave your business.

Over time, in business as in marriage, partners can grow apart. We’ve all witnessed the resentments, discord, and wastefulness of a friend’s or acquaintance’s needless nasty divorce. Business divorces can be equally unpleasant—with an added twist: One may be unable to leave the business, or force a partner to leave, without appropriate tax and legal planning.

When you or a co-owner wants out, what will happen? Chances are that when you turn to your company’s buy-sell agreement, you will find that it is woefully out of date. You may also find that it controls the terms of your (or any owner’s) exit from the business not only upon death, but also during lifetime.

If you haven’t looked over your company’s buy-sell agreement since you signed it, dust it off and check out at least four key provisions:

Lifetime and death transfers of ownership:
When must an owner sell, or offer to sell?
When must an owner (or the company) buy and when does it have the option to buy?
How will the value of the company and the value of a departing owner’s interest be determined?
Does the agreement mandate the use of an independently determined Fair Market Value at the time of transfer? If not, the valuation will favor you or the other owner. It will not treat you even-handedly.
What are the terms (length, down payment, interest and guarantees) of the buyout?
We generally assume that buy-sell agreements control the transfer of an owner’s interest when he or she dies or becomes disabled. Indeed, they do that. But they usually do much more and if you don’t appreciate how much more, disaster looms.

At his annual physical, Steve Hughes complained that he was bone tired. After a battery of tests, Steve’s doctor observed that, while there was nothing physically amiss, Steve did seem depressed. After some introspection, Steve was able to articulate that he had no interest in continuing as a partner in a successful CPA firm. Like many owners, Steve had lost the passion and commitment to the business that still stoked his younger co-owners. He decided to sell out before his partners demanded it.

Steve broke the news of his departure to his two partners and noted that their buy-sell agreement controlled only a buyout at death and an option for the company to buy Steve’s stock if he were to sell it to a third party. Attempting to sell a partial interest in most businesses to a third party is always a difficult proposition, but current economic challenges made that course of action impossible.

Steve and his partners were left in a classic dilemma: remaining shareholders want to purchase the departing shareholder’s interest so that future stock appreciation—due solely to their efforts—would be fully available to them. Conversely, because the profits of a closely-held corporation are either accumulated by the company or distributed to the active shareholders in the form of salaries, bonuses and other perks, the departing shareholder (now an inactive owner) rarely receives significant income in the form of distributions or dividends.

Naturally, Steve wanted and needed maximum value for his interest while his co-owners were convinced that the company’s cash flow could not support Steve’s buyout.

So, look again at your business continuity agreement: If you are the one leaving, is it as fair as it is if you are the one left behind?

When you sit for the first time across the bargaining table from your partner, you will want that table set with a fair valuation method, a thoughtfully designed lifetime buyout provision (that may well reduce the cash flow required for a buyout by 20 to 30 percent), and manageable payment provisions. Since it is exceedingly difficult to design these provisions when buyer and seller are at the bargaining table, agree to and document the valuation, cash flow, tax, and payment provisions long before potential discord or differences of outlook arise.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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The Essential Business Ageement: A Business Continuity Agreement Among Owners

Saturday, April 13th, 2013

Presented by T. Ray Phillips

If you co-own your business, the business continuity agreement (or “buy-sell”) is one of the most important documents that you will sign. If you have a buy-sell that is out-of-date, un-reviewed or focuses on the wrong issues, it may well be worse than having no agreement at all.

Let’s start with a hypothetical case study that illustrates the importance of drafting a buy-sell agreement that anticipates and provides for all transfer events (lifetime transfers or death).

George Acme’s son-in-law, Tom Gardner, had been with George’s company for over 20 years. Tom had gradually assumed operational management, was the acting CEO, and had purchased 25 percent of George’s ownership over the years—mostly at a low value in recognition of his valuable services. Eventually, everyone acknowledged that Tom would one day own the company and carry on the fine traditions of Acme.

But that was before George died and Tom’s sister-in-law, Babette, became the executor of the estate. Babette told Tom that she would sell him the balance of the company—but at full fair market value and in cash—or she would sell the business to the highest bidder.

Only later did she realize that without Tom’s cooperation, the business was unlikely to sell. No buyer wants a disgruntled minority co-owner, especially when he’s the current CEO.

Tom and Babette disagreed about value, control and successor ownership. All these issues could have best been discussed and resolved before George’s death. Had Tom and George created a business continuity agreement, the business would have transferred at a fair price to the benefit of all concerned. Now, because the owners weren’t talking—except through their lawyers—it was unlikely that Acme could even keep its doors open.

Lifetime or Death Events

The business continuity agreement (also called a buy-sell agreement) controls the transfer of ownership in a business when certain lifetime or death events occur. Typically the “trigger” events include the death of an owner, and a sale and transfer of stock from one owner to another or to an outside party. Your buy-sell can also describe your agreement about how transfers will take place during the owners’ lifetimes such as an owner’s permanent and total disability, termination of employment, retirement, bankruptcy, divorce, and/or a business dispute among the owners.

Consider one example: Assume George didn’t die, but that one of the owners wanted to exit. How do they agree on value, buyout terms, or design the acquisition? Without a buy-sell agreement agreed to in advance, one owner’s desire to exit can transform longtime co-owners into adversaries. The buy-sell sets the valuation method, the terms of the purchase and outlines the tax planning.

In essence a lifetime buyout of an owner is similar in design and consequence to the sale of the entire company to a third party.

The value of the business, the terms of the sale (payment, security, etc.) will all be negotiated. In internal transfers, however, hard-nosed negotiation tactics and disputes about value and payments can quickly destroy friendships, company culture or even the value of the business.

The best way to avoid this is to agree in advance on the method of appraising value and payment terms when all of the co-owners are on the same page—looking out for the ultimate welfare of the company and not knowing whether they will ultimately be a buyer or a seller.

At each of these events, the business continuity agreement may require the business or the remaining owners to purchase the departing owner’s stock; or it may give an option to the business or the remaining owners to buy that ownership interest. Or it may give the departing owner the option to require the company to buy his or her ownership interest.

Remove the Guesswork
read full article »

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Fraud: Do You Know It When You See It?

Wednesday, January 9th, 2013

Presented by T. Ray Phillips

The subject of employee dishonesty is a delicate one. Owners generally want to trust their employees, and given all the other battles owners fight on a daily basis, they are often not as vigilant as they can or should be. Vigilance requires an investment of time and money in return for an uncertain payoff.

Here’s one example of a typical fraud scenario:

Lou Spencer’s CFO, Marty Jacks, had been with Lou’s company for 15 years. While Lou reviewed company financial reports and often the accounts receivable aging report, he let Marty handle the day-to-day financial operations. To say that Lou was surprised when one of his vendors mentioned that he’d run into Marty on the floor of a Las Vegas casino at 4:00 a.m. would be an understatement. As far as Lou knew, Marty spent every weekend at home or camping with his family.

Rather than confront Marty immediately, Lou casually asked his golf partner (a CPA who also happened to be a Certified Fraud Examiner) about employee theft.

The CPA listed more ways to steal than Lou could imagine, but Lou did remember:

Creating fictitious vendors or employees.
Stealing inventory.
Giving oneself undisclosed and unauthorized pay raises.
“Lapping” or taking payment from one customer and applying it to another’s account.
The CPA explained to Lou the three conditions present in any fraud situation: motive, opportunity and rationalization.

“Has anyone run into financial difficulties?” he asked. “Maybe a sick kid? The unemployment of a spouse or even the readjustment of payments on a home loan?” Lou could not think of anyone in those situations.

Lou understood the “opportunity” factor immediately. He admitted that because he trusted Marty implicitly he was not reviewing every report carefully. Marty certainly had opportunity.

Rationalization: Lou was fairly confident that his employees—including Marty—were satisfied with their salary and benefit packages. Except for an occasional afternoon of golf, Lou believed he worked as hard as any of them.

The CPA suggested that before acting, Lou retain a fraud analyst to conduct a fraud audit. At a minimum, Lou should review his financial statements and this time, rather than focus on the decline in revenues, look for any anomaly or anything that “bucks the trend.” Lou returned to an empty office to do exactly that.

What Lou discovered caused him to call his golf buddy to schedule a meeting about a Fraud Deterrence Audit. Lou swallowed hard as he signed an engagement letter for an audit that would cost his $20M company between $20,000 and $25,000.

After several weeks of review, the CPA laid out the situation for Lou. Marty had a gambling habit (motive). Over the past 18 months, Marty had set up numerous bogus vendor accounts and had siphoned off almost $1 million to these accounts (opportunity). When Marty started pulling small amounts of cash out without Lou noticing, Marty decided that since Lou didn’t miss the cash, Lou could do without it (rationalization).

Armed with the facts, Lou fired Marty. There was no way to recover the money, so Lou and the Fraud Examiner concentrated instead on ways to prevent this scenario from reoccurring.

We asked Edward Bortnick, a CPA, Certified Fraud Deterrence Analyst and Certified Financial and Forensic Accountant, and Certified Valuation Analyst from Rockville, Maryland for his best fraud prevention advice.
read full article »

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